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SBI+ Bank of Baroda

November 1, 2008

SBI reported 11% growth in its net profits to Rs23.8bn in 2Q2008.Operating revenue was up 27% and is marginally ahead of our expectations by 5%. Lower operating cost growth (up 9%) boosted PPOP growth to 55% yoy. The bank has provided Rs6.93bn as estimated liability with respect to wage revision, but details regarding the accounting for the same are not available. Provisioning for NPA has been higher than our expectations by 14%. We expect this trend to continue as provision coverage for the bank is low compared to the industry.

SBI showed aggressiveness as it continued to grow its business well above the sector average. Loan growth of 38% y-o-y and deposit growth of 28% at September-end defied signs of a slowdown. However, the timing of SBI’s growth drive during the business downcycle may be less than ideal. This was reflected in loan loss provisions, which increased markedly in 2Q following a writeback in the preceding quarter. Because SBI’s loan loss coverage ratio stands at a mere 47% at September-end, much lower than that of its peers BOB (at 77%) and PNB (at 75%), we believe risks due to rapid loan growth may not be adequately covered.

SBI’s life insurance and asset management business has slowed down in-line with Indian markets. DSP ML expects SBI to report an EPS of Rs 122.50 for FY09. Goldman Sachs is expecting SBI to report an EPS of Rs 123.86 while HSBC expects SBI to report an EPS of Rs 117.

Bank of Baroda:
BOB reported net profit of INR3.95bn, up 21% y-o-y but lower than our estimates of INR4.1bn, owing to surge in provisions and contingencies. NII growth at 15.5% y-o-y regained momentum in Q2FY09, having grown at a modest pace in the preceding quarters. BOB continued to maintain loan growth (32% at September end) above the sector, average. Net interest margin was up c10bps q-o-q to 2.80% in Q2FY09 on the back of robust growth in low cost savings deposit.

Bank of Baroda (BOB) had an overseas investment book of INR38bn comprising c40% credit derivatives, c40% corporate bonds and c20% sovereign bonds. While this by itself wasn’t a very sizeable exposure, accounting for just 10% of the total investment book at September end, BOB recorded MTM losses to the tune of cINR1.5bn on the overseas book in Q2FY09, up c350% q-o-q and constituting c60% of the total provisions and contingencies, which surged by 150% y-o-y as a result.

DSP Merill expects BOB to report an EPS OF Rs 39 while HSBC expects it to be Rs 42 for FY09.

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